When it comes to taxes, what deductions are available for commercial real estate? Currently, a valuable income tax deduction related to real
estate is for depreciation, but the depreciation period for such property is
long and land itself isn’t depreciable. Whether real estate is occupied by your
business or rented out, here’s how you can maximize your deductions.

Segregate personal property from buildings

Generally, buildings and improvements to them must be
depreciated over 39 years (27.5 years for residential rental real estate and
certain other types of buildings or improvements). But personal property, such
as furniture and equipment, generally can be depreciated over much shorter
periods. Plus, for the tax year such assets are acquired and put into service,
they may qualify for 50% bonus depreciation or Section 179 expensing (up to
$510,000 for 2017, subject to a phaseout if total asset acquisitions for the tax
year exceed $2.03 million).

If you can identify and document the items that are personal
property, the depreciation deductions for those items generally can be taken
more quickly. In some cases, items you’d expect to be considered parts of the
building actually can qualify as personal property. For example, depending on
the circumstances, lighting, wall and floor coverings, and even plumbing and
electrical systems, may qualify.

Carve out improvements from land

As noted above, the cost of land isn’t depreciable. But the cost
of improvements to
land is
depreciable. Separating out land improvement costs from the land itself by
identifying and documenting those improvements can provide depreciation
deductions. Common examples include landscaping, roads, and, in some cases,
grading and clearing.

Convert land into a deductible asset

Because land isn’t depreciable, you may want to consider real
estate investment alternatives that don’t involve traditional ownership. Such
options can allow you to enjoy tax deductions for land costs that provide a
similar tax benefit to depreciation deductions. For example, you can lease land
long-term. Rent you pay under such a “ground lease” is deductible.

Another option is to purchase an “estate-for-years,” under which
you own the land for a set period and an unrelated party owns the interest in
the land that begins when your estate-for-years ends. You can deduct the cost
of the estate-for-years over its duration.

More limits and considerations

There are additional limits and considerations involved in these
strategies. Also keep in mind that tax reform legislation could affect these
techniques. For example, immediate deductions could become more widely
available for many costs that currently must be depreciated. If you’d like to learn
more about saving income taxes with business real estate, please Scott Taylor, CPA.